United Arab EmiratesThe United Arab Emirates (UAE) is important to world energy markets because it contains 98 billion barrels, or nearly 10%, of the world's proven oil reserves. The UAE also holds the world's fourth-largest natural gas reserves and produces significant amounts of liquefied natural gas.

Note: Information contained in this report is the best available as of October 2000 and can change. GENERAL BACKGROUNDThe United Arab Emirates (UAE) is enjoying strong economic growth as a result of the rise in oil prices which began with OPEC production cuts in March 1999. While the UAE has a relatively diversified economy for a Persian Gulf oil exporter, the collapse in oil prices from late 1997 to early 1999 resulted in a decline in real gross domestic product (GDP) of 5.0%. Real GDP growth for 1999 was 9.5%, and it is projected at 10.5% for 2000.

Political SystemThe UAE is a federation of seven emirates - Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Ras al-Khaimah, and Umm al-Qaiwain. Political power is concentrated in Abu Dhabi, which controls the vast majority of the UAE's economic and resource wealth. The two largest emirates -- Abu Dhabi and Dubai -- provide over 80% of the UAE's income. In June 1996, the UAE’s Federal National Council approved a permanent constitution for the country. This replaced a provisional document which had been renewed every five years since the country’s creation in 1971. The establishment of Abu Dhabi as the UAE’s permanent capital was one of the new framework’s main provisions.

Other Industry In recent years, the UAE has undertaken several projects to diversify its economy and to reduce its dependence on oil and gas revenues. The non-oil sectors of the UAE's economy presently contribute more than two-thirds of the UAE's total GDP, and about 30% of its total exports. The federal government has invested heavily in sectors such as aluminum production, tourism, aviation, re-export commerce, and telecommunications. As part of its strategy to further expand its tourism industry, the UAE is building new hotels, restaurants and shopping centers, and expanding airports and duty-free zones. Agriculture also makes up a significant portion of the UAE's economy. Dubai has become a central Middle East hub for trade and finance, accounting for about 70% of the Emirates’ non-oil trade.

Foreign Affairs The UAE and Iran continue to dispute the ownership of three islands, Abu Musa and the Greater and Lesser Tunb Islands, which are strategically located in the Strait of Hormuz. All three islands were effectively occupied by Iranian troops in 1992. The Mubarak field, which is located six miles off Abu Musa, has been producing gas-rich oil since 1974. In 1995, the Iranian Foreign Ministry claimed that the islands are "an inseparable part of Iran." Iran rejected a 1996 proposal by the Gulf Cooperation Council (GCC) for the dispute to be resolved by the International Court of Justice, an option supported by the UAE. In early 1996, Iran took further moves to strengthen its hold on the disputed islands. These actions included starting up a power plant on Greater Tunb, opening an airport on Abu Musa, and announcing plans for construction of a new port on Abu Musa. In the dispute, the UAE has received strong support from the GCC, the United Nations, and the United States. Although Iran remains a continuing concern for officials in Abu Dhabi, they have chosen not to escalate the territorial dispute. Iran is one of Dubai’s major trading partners, accounting for 20% to 30% of Dubai’s business. In September 2000, Iran stated its willingness to resume talks with the UAE on the dispute.

Relations between Saudi Arabia and the UAE also have shown some signs of strain during the last two years, due to Saudi development of the Shaybah oilfield, with estimated reserves of 14 billion barrels of crude oil. The UAE and Saudi Arabia do not have a precisely defined border in the sparsely populated desert separating them, and the Shaybah field straddles territory claimed by both governments. Saudi Arabia began production from the Shaybah field in late 1998. The UAE has demanded an agreement to share production from Shaybah.

OIL The UAE contains proven crude oil reserves of 97.8 billion barrels, or slightly less than 10% of the world total. Abu Dhabi holds 94% of this amount, or about 92.2 billion barrels. Dubai contains an estimated 4.0 billion barrels, followed by Sharjah and Ras al-Khaimah, with 1.5 billion and 100 million barrels of oil, respectively.

The majority of the UAE’s crude oil is considered light, with gravities in the 32o to 44o API range. Abu Dhabi's Murban 39o and Dubai's Fateh 32o blends are the UAE's primary export crudes. Most of the UAE’s oil fields have been producing since the 1960s or early 1970s. Proven oil reserves in Abu Dhabi have doubled in the last decade, mainly due to significant increases in rates of recovery. Abu Dhabi has continued to identify new finds, especially offshore, and to discover new oil-rich structures in existing fields.

Under the UAE's constitution, each emirate controls its own oil production and resource development. Although Abu Dhabi joined OPEC in 1967 (four years before the UAE was formed), Dubai does not consider itself part of OPEC or bound by its quotas.

In response to the period of low oil prices in 1998 and early 1999, OPEC agreed in March 1999 to reduce output in an effort to shore up the price of crude. The UAE’s production quota was lowered to 2.00 million bbl/d. Actual production fell from a 1999 high of 2.25 million bbl/d in February 1999 to 2.05 million bbl/d in May 1999. After three rounds of OPEC quota increases in 2000, the UAE quota rose to 2.29 million bbl/d on October 1, 2000. Production in the third quarter of 2000 was 2.27 million bbl/d, and may climb to 2.35 million bbl/d in the fourth quarter of 2000. The UAE's total capacity is 2.60 million bbl/d, making it second only to Saudi Arabia for excess production capacity among OPEC member states.

Restructuring On October 12, 1998, the Abu Dhabi National Oil Company (ADNOC) announced a major plan to restructure its management. The plan consolidated ADNOC’s operations under five new directorates: Exploration and Production, Gas Processing, Chemicals, Marketing and Refining, and Shared Services (Administration).

Refining The UAE has two refineries operated by ADNOC. The Ruwais refinery underwent a $100-million upgrade in 1995 to a capacity of 145,000 bbl/d. It produces light products mainly for export to Japan and India. Fuel oil from Ruwais is sold as bunkers by ADNOC and also used for domestic power generation. A $1.2-billion second-phase Ruwais expansion is to include a new 135,000-bbl/d crude distillation unit, a 130,000-bbl/d fractionation plant, and expansion of residual oil conversion facilities with a 40,000-bbl/d hydrocracker and a 36,000-bbl/d visbreaker. ADNOC bagan processing condensate from the Bab and Asab fields at the fractionation unit in May 2000. When the rest of the project is completed by 2003, Ruwais’ total capacity will be around 415,000 bbl/d.

UAE has four smaller refineries. Umm al-Nar, in Abu Dhabi, with a capacity of 88,500 bbl/d. Since its construction in 1976, the Umm al-Nar plant has undergone debottlenecking as well as a recent expansion. The refinery primarily supplies the domestic market. Metro Oil has a 75,000-bbl/d refinery in Fujairah. The Emirates National Oil Company (ENOC) Jebal Ali condensate refinery, with a capacity of 140,000 bbl/d, began operation in Dubai in May 1999. A 40,000 bbl/d second-hand gasoline unit, owned by the private firm ISO Octane, opened near Jebal Ali in May 2000.

Foreign Downstream Operations In October 1998, the International Petroleum Investment Company (IPIC), the UAE’s downstream investment outfit, agreed to purchase 50% of the Hyundai Oil Refinery Company of South Korea for $500 million. The UAE is the second-largest crude oil supplier to South Korea after Saudi Arabia. IPIC’s overseas holdings also include a 10% stake in Spain’s CEPSA and a 19.6% share of Austria’s OMV.

NATURAL GAS The UAE’s natural gas reserves of 212 trillion cubic feet (Tcf) are the world's fourth largest after Russia, Iran, and Qatar. The largest reserves of 196.1 Tcf are located in Abu Dhabi. Sharjah, Dubai, and Ras al-Khaimah contain smaller reserves of 10.7 Tcf, 4.1 Tcf, and 1.1 Tcf, respectively. In Abu Dhabi, the non-associated Khuff gas reservoirs beneath the Umm Shaif and Abu al-Bukhush oil fields rank among the world's largest. Current gas reserves are projected to last for about 150-170 years.

Increased domestic consumption of electricity and growing demand from the petrochemical industry have provided incentives for the UAE to increase its use of natural gas. Over the last decade, gas consumption in Abu Dhabi has doubled, and is projected to reach 4 billion cubic feet per day (bcf/d) by 2005. The development of gas fields also increases exports of condensates, which are not subject to OPEC quotas.

Projects The past few years have seen the UAE embark on a massive multi-billion dollar program of investment in its gas sector including a shift toward gas-fired power plants and the transformation of the Taweelah commercial district into a gas-based industrial zone. An ambitious plan, the Dolphin Project, to interconnect the gas grids of Qatar, the UAE, and Oman, also is planned.

The second phase of the UAE's $1-billion onshore gas development program (OGD-2) at the Habshan natural gas complex located directly over the huge Bab oil and gas field is currently underway. This second phase includes the construction of three or four gas processing trains to process 1 bcf/d of gas, 300-500 tons per day (t/d) of natural gas liquids, 35,000-55,000 t/d of condensate and up to 2,100 t/d of sulphur. The construction contract was awarded to Italy’s Snamprogetti in October 1998. Construction is scheduled to be completed in early 2001.

Another project closely linked with OGD-2 is the Asab gas development project, which was completed in 1999. The Asab development processes around 830 million cubic feet per day (Mmcf/d) of associated wet gas from the Thamama F and G reservoirs and produces up to 100,000 bbl/d of condensate for processing at the Ruwais refinery. The gas will also support other industries in Ruwais and be re-injected into Asab reservoirs to maintain field pressure. The $700-million project was awarded to Snamprogetti in June 1997 by UAE’s Supreme Petroleum Council.

Supplying Dubai Dubai’s gas consumption is expected to grow by nearly 7% annually through 2005, due to expansion of the emirate's industrial sector, a switch to gas by its power stations, and the need for an enhanced oil recovery (EOR) system based on gas injections for its dwindling oil formations. Dubai projects future demand will average 810 Mmcf/d in 2005, with major swings between summer and winter consumption patterns. Currently, Dubai’s entire gas supply comes from fellow UAE member Sharjah, which transports about 430 Mmcf/d at approximately $1.25/million Btu. Amoco operates three fields and the 800-Mmcf/d Sajaa processing facility in conjunction with the Sharjah government.

A project to pipe gas from the offshore Khuff field to Dubai and the Taweelah industrial complex was abandoned in May 1999. Instead, Dubai will be connected to the main Abu Dhabi gas receiving station by a pipeline.

The Dolphin Project The Dolphin Project aims to develop links between the gas infrastructures of Qatar, the UAE, and Oman, with a possible future link to Pakistan. It will allow the export of non-associated gas from Qatar's massive offshore North Dome field. A Statement of Principles for the project was signed in March 1999 between the UAE Offsets Group (UOG) and the Qatar General Petroleum Corporation (QGPC). Mobil Oil Qatar signed a memorandum of understanding covering its participation in the project's upstream component in July 1999. Estimated to cost $8-10 billion over the next 6-7 years, the project will begin as a subsea pipeline from Ras Laffan in Qatar to a landfall in Abu Dhabi, which will then be extended to Dubai and northern Oman. It will start at 48 inches in diameter, narrowing to 30 inches by the time it reaches Oman. In its initial phase, the pipeline is to carry 3 Bcf/d of Qatari gas to the UAE and Oman, accounting for nearly 10% of total world gas supplies shipped by pipeline.

In October 1999, UOG and ADNOC issued a joint declaration dividing up gas distribution between them. Gas from the Dolphin Project will be the exclusive supply for gas-fired power plants, except in the Western Region of Abu Dhabi, and will also supply gas for ADNOC contracts with Dubai. Gas from the Dolphin Project will use the ADNOC distribution network until the project develops its own network. In March 2000, UOG signed a contract with two foreign firms, TotalFinaElf and Enron, after securing purchase agreements with Abu Dhabi, Dubai, and Oman. UOG will hold 51% of the equity in the Dolphin Energy consortium, with the remaining portion equally split between Enron and TotalFinaElf. TotalFinaElf will concentrate on the upstream, developing gas production from a block in the Qatari offshore North Field. Enron will build the pipelines connecting the North Field with the UAE and Oman. Negotiations with the Qatar General Petroleum Corporation (QGPC) on pricing for the gas are continuing, and the project cannot reach financial closure until the pricing issues have been resolved.

The planned extension from Oman to Pakistan may be built in 2005 or later, and would carry 1.5 Bcf/d onward to Pakistan. This phase of the project is dependent on Pakistan's ability to pay for the gas, which is questionable given the current weakness of its economy, but UAE officials involved in the planning of the project have said Pakistan is being included because they take a "long term view" of Pakistan's potential for economic development, including possible UAE investments in enterprises such as independent power plants (IPP's) in Pakistan which would consume the gas.

ELECTRICITY The UAE’s soaring demand for electric power, coupled with volatile swings in peak loads, led the Emirates in 1997 to form a Privatization Committee for the Water and Electricity Sector. In early 1998, the committee called for a comprehensive restructuring, including the elimination of the state-owned Abu Dhabi Water and Electricity Department (ADWED) in favor of sweeping privatization. ADWED will be tranformed into a regulatory body, the Abu Dhabi Water and Electricity Authority (ADWEA). The government plans to take a majority holding in the new ventures with minority interests held by foreign firms. Gradually, the government will privatize its shares through initial public offerings (IPOs), allowing UAE nationals to become shareholders.

TotalFinaElf and Tractebel were awarded a contract by ADWEA in August 2000 for an upgrade to the Taweelah A-1 plant, which will also give a 20% ownership stake to each of the foreign partners, with the rest remaining with ADWEA. The upgrade will bring the capacity of the plant to 1,350 megawatts (MW).

Another step in the reorganization is the expansion of the Taweelah cogeneration facility. The expansion, known as Taweelah A-2, is the UAE’s first independent water and power project (IWPP), and reached financial close in April 1999. It is the second independent power project in the Gulf after Oman’s al-Manah facility. With a price tag of some $800 million, the expansion is to add about 763 megawatts (MW) of power and 50 million gallons of desalinated water to the UAE’s supplies. The first 370-MW came online in July 2000. The rest of the project is scheduled for completion by August 2001. The Taweelah A-2 project is to be run by Emirates CMS Power, a joint venture between CMS Energy (40% ownership interest) and the newly-formed Emirates Power Company (EPC) (60%).

The al-Taweelah Power Company will manage the Taweelah B facility. The plant, which currently has six 122-MW steam turbines and six 13 million gallon-per-day (g/d) multi-stage flash units, is now undergoing a $360 million expansion. The addition of two new gas-turbine units will bring the plant’s capacity to 1,220 MW and 103 million g/d of water. The Umm al-Nar Power Company will operate the plant by the same name with a 1,215-MW, 97-million-g/d facility, which will be upgraded with two new 3.5 million g/d desalination units. The new units will run on steam already available at the site. The company will also operate the 120-MW Baniyas station.

The Abu Dhabi Water and Electricity Authority (ADWEA) currently is soliciting bids, due in January 2001, for the Shuweihat IPP project. The first phase of the project would have a capacity of 1,500 MW, with later additions possibly bringing capacity to 5,000 MW by 2009.

The UAE also is taking part in a $1 billion plan to build a regional power grid throughout the countries of the Gulf Cooperation Council (GCC). The first phase of the plan would link Saudi Arabia, Kuwait, Bahrain and Qatar; the UAE and Oman would join the grid in the second phase of the plan. GCC electricity ministers signed a final agreement on the project in June 1999. The plan is based on the assumption that each country will have its own unified power grid, and the UAE is doing its part by connecting all the power stations along its western coast with the central region.

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